In many ways 2024 was a goldilocks year. Consensus heading into the year called for three Federal Reserve rate cuts, cooling inflation, and resilient growth in the U.S. From an economic perspective, that is exactly what we got. Despite concerns about valuation, this mix was just right for the S&P 500, which responded by rallying 25%, marking a second consecutive year of 20%+ gains – a feat not seen since 1999.

Tactical Allocation Takeaways

• We are not recommending any changes to our current tactical allocations. We continue to maintain a positive outlook for the global economy but are mindful of the uncertainty around geopolitical events including policies of the new U.S. administration.
• We continue to reflect on the risks associated with U.S. equity markets that have quite optimistic earnings expectations reflected in today’s prices and growing concentration risk as a few companies represent a larger portion of the market. On the other hand, non-U.S. equity market valuations are reflective of much more moderate economic outcomes.  That is to say that we prefer to remain well diversified because there are not obvious and meaningful asymmetric risk-adjusted return opportunities in any region.
• We continue to maintain a slight underweight to U.S. Large Cap equities in favor of cash/short-duration fixed income but will be exploring opportunities in Credit Risk Alternatives during the quarter ahead to evaluate whether better trade-offs exist there.
• Expect greater volatility in 2025 as policy uncertainty is expected to persist throughout the year.

Investors looking in the rearview mirror may be mesmerized by the back-to-back 20%+ returns enjoyed by the S&P 500 Index these past two years. Looking ahead, our economic outlook for the U.S. is more favorable, but a more thorough assessment of valuations relative to implied growth rates is warranted.